The present invention is related generally to systems and methods for selling employee stock options or other instruments provided as part of a compensation program.
Many corporations issue stock options to some of their employees as part of their compensation plans. Employee stock options (“ESOs”) are option contracts that give the employee the right, but not the obligation, to buy a certain amount of shares in their employer (the stock issuer) at a predetermined price (“the strike price”). In most circumstances, an employee must wait a specified period (the “vesting period”) before being allowed to exercise the options. Also, ESOs are generally not transferable.
An ESO is considered to be “underwater” or “out-of-the-money” when the strike price is greater than the price at which the stock is trading. When an ESO is underwater, it typically has little or no value to the employee, although it may have a higher theoretical option value.
Published U.S. patent application Pub. No. 2005/0114242 discloses a system and method for the transfer of ESOs. In the process described in this published patent application, the issuer (e.g., the employer) issues a transferable ESO to an employee. A holding entity, through its broker-dealer, creates a bid for the ESO, which is submitted to the employee, who can decide whether or not to sell the ESO at the bid price. If the employee decides to sell the ESO, the broker-dealer buys the ESO from the employee for the bid amount with either cash or stock.
In another embodiment disclosed in the above-mentioned published patent application, the issuer issues ESOs to an employee having the conventional restrictions on transferability. At some point in time, the issuer determines that some of the employee's ESO should be transferable. The issuer, working with the broker-dealer, determines which of the employee's ESOs should be transferable. The broker-dealer then develops an option-price grid for those ESOs. The option-price grid is a grid that indicates the price for the ESOs based on the strike price for the ESOs and the trading price of the issuer's stock. After receiving the option-price grid, the employee has a period of time to decide whether to sell the ESOs at the price indicated by the option-price grid. If the employee decides to transfer the ESOs, the employee transfers the ESOs to the issuer. The issuer receives the payment for the ESOs from the broker-dealer and, in exchange, the issuer transfers amended ESOs to the broker-dealer. The employee also receives the payment for the options transferred to the issuer.